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It turns out that 'full employment' does not mean zero unemployment! What is the truth behind the natural unemployment rate?
The concept of the natural rate of unemployment plays an extremely important role in economics, especially in analyzing economic vitality and employment stability. Although many people assume that "full employment" means there is no unemployment, in fact, the definition of this term is quite complicated. According to the research of economists Milton Friedman and Edmund Phelps, full employment does not mean zero unemployment, but refers to the natural unemployment rate under certain economic conditions.
The concept of natural unemployment rate shows that "full employment" in the economy does not mean "zero unemployment".
The natural unemployment rate is a theory that is still widely accepted in the economics community. It is defined as the unemployment rate observed in an economic system when the economic state reaches "long-term equilibrium." This means that even in a "healthy" economy, there will still be some degree of unemployment due to frictional and structural unemployment.
Frictional unemployment typically refers to temporary unemployment as people look for new jobs or change careers, while structural unemployment is caused by economic transformation or skills mismatch. The existence of these factors means that even when the economy is growing steadily, there will still be a certain proportion of unemployed people. Friedman first clearly proposed the concept of the natural unemployment rate in his 1968 speech to the American Economic Association, pointing out that the current unemployment level is closely related to the real imperfections in the economic structure and market conditions.
As Friedman put it: "At any given moment in time there is a level of unemployment whose characteristics are consistent with the equilibrium structure of real wages."
In addition, Friedman pointed out that the natural rate of unemployment is influenced by the supply side of the economy, including production capacity and the characteristics of economic institutions. If there are long-term role mismatches in the labor market or real wage rigidities, the natural rate of unemployment may lead to meaningless unemployment. Therefore, when trying to reduce unemployment, policymakers need to understand that relying solely on demand management policies (such as monetary policy) cannot permanently change the natural unemployment rate, and must turn to structural policies to adjust the supply side of the economy.
As the economists note, between two and two-thirds of economists generally agree that there is a natural rate of unemployment toward which the economy tends in the long run. The widespread acceptance of this view reflects the deep connection between theory and reality, especially when it comes to assessing economic health and job quality.
The formation and challenges of the natural unemployment rate
Although the concept of the natural rate of unemployment is accepted, it has still been challenged. Some critics argue that there is a lack of hard evidence that there is a single natural rate of unemployment. In fact, Friedman also mentioned in his research that we cannot know exactly what the "natural" rate is. The basic assumption of the theory is that there is a unique equilibrium level of unemployment, but this may not exist in reality.
Critics of the natural rate of unemployment point out that historical data show that the return to unemployment does not always follow the expected natural rate of unemployment.
Furthermore, various economists have suggested that the range of unemployment rates may be more like a natural range than a single equilibrium point. For example, according to some models, after an economic shock, the unemployment rate may not return to the so-called natural rate of unemployment, which contradicts traditional economic theory.
In summary, the concept of the natural rate of unemployment continues to spark debate, which shows its importance to the understanding of economics. It not only makes policymakers aware of the complexity of the unemployment problem, but also points out the role that structural reforms must play in stabilizing and increasing employment. In this case, how can we find a balance point to reduce unemployment during economic development?
